43-1096. Credit for income taxes paid by nonresident; definitions

A. Subject to the following conditions, nonresidents shall be allowed a credit against taxes imposed by this title for net income taxes imposed by and paid to the state or country of residence on income taxable under this title:

1. The credit shall be allowed only if the state or country of residence either does not tax income of residents of this state derived from sources within that state or country or allows residents of this state a credit against taxes imposed by that state or country on the income for taxes paid or payable under this title.

2. The credit shall not be allowed for taxes paid to a state or country that allows its residents a credit against the taxes imposed by that state or country for income taxes paid or payable under this title irrespective of whether its residents are allowed a credit against the taxes imposed by this title for income taxes paid to that state or country.

3. The credit shall be allowed only for the proportion of the taxes paid to the state or country of residence as the income taxable under this title and also subject to tax in the state or country of residence bears to the entire income on which the taxes paid to the state or country of residence are imposed.

4. The credit shall not exceed the proportion of the tax payable under this title as the income taxable under this title and also subject to tax in the state or country of residence bears to the entire income taxable under this title.

B. The taxpayer may apply the allowable credit only against Arizona income tax for the same taxable year in which the income is subject to tax in the other state.

C. If the taxpayer claims the credit for taxes paid to a foreign country, the taxpayer shall use the conversion rate in effect on the date the taxpayer paid the taxes to the foreign country.

D. For the purposes of this section:

1. "Entire income on which the taxes paid to the state or country of residence are imposed" means the other state's or country's adjusted gross income computed under the equivalent of section 43-1001, but does not include any exemption allowable under the equivalent of section 43-1023.

2. "Entire income taxable under this title" means Arizona adjusted gross income computed under section 43-1094 but does not include any exemption allowed under section 43-1023.

3. "Income taxable under this title and also subject to tax in the state or country of residence" means the portion of income that is included in entire income taxable under this title that is also included in the entire income on which the taxes paid to the state or country of residence are imposed.  The taxpayer shall increase or reduce the portion of income that is included in the entire income taxable under this title by any related additions under section 43-1021 and by any related subtractions under section 43-1022. The taxpayer shall increase or reduce the portion of income that is included in the entire income on which taxes paid to the state or country of residence are imposed by any related additions and subtractions under the other state's equivalent of sections 43-1021 and 43-1022, as applicable.

4. "Net income tax":

(a) Means:

(i) A tax that grants deductions or exemptions from gross income.

(ii) Any tax imposed by another country that qualifies for a credit under sections 901 and 903 of the internal revenue code and the regulations under those sections, even if withheld from income.

(b) Except as specifically included in subdivision (a) of this paragraph, does not include:

(i) A system of taxation that assesses taxes on gross income, gross receipts or gross dividends.

(ii) Taxes withheld from income.

5. "Tax payable under this title" means the income tax imposed by this state on the taxpayer's taxable income computed under section 43-1095 minus any tax credit amount claimed for the taxable year under article 5 of this chapter but not including the credit amount allowed under this section.